Corporate Canada stronger than ever, CIBC report shows

Though the global economy is far from a true return to form, Canadians might be able to take some comfort in the fact that corporate Canada is in better shape than it was before the recession. And it's our robust corporate vigor that will help the sector to capitalize on growth opportunities and weather any short-term challenges that may lie ahead, according to a new report from CIBC World Markets Inc.

"It's encouraging that a health check on Canada's corporate sector shows businesses across the country passing with flying colours," says Avery Shenfeld, chief economist at CIBC and co-author of the report. "Having gone through the global financial crisis, when refinancing maturing debt became more difficult, companies are being more conservative. Holding extra cash, or being less debt reliant, is a safety valve should there be a shock to markets in the future."

CIBC's new composite indicator of corporate strength analyzed nine key measures including debt, cash on hand and profits.

Analysis shows corporate Canada's strength is broad, as opposed to concentrated in one or two industries or sectors. In fact, improvements in cash positions and profit margins over recent years are more impressive when the bustling energy sector is excluded, the report reads.

While cash reserves and liquidity are important, Finn Poschmann, vice-president of research at the C.D. Howe Institute in Toronto, warns Canadian firms aren't taking advantage of reinvestment opportunities.

"We haven't seen the strong financial position of businesses converted to new investment products in plant machinery, equipment, and processes," he says. "It would be very good for the economy to see the financial strength of Canadian businesses turn into new investment in pursuit of new opportunities."

In general, business leaders may think the visibility of opportunity is not there. That could be to do with uncertainty about global economic prospects and it could be due to uncertainty over government policy and federal and provincial taxation.

"The fact that corporate tax relief has been put on hold or reversed in one of the provinces is suggestive as well as to why businesses might be holding back on domestic investment," Poschmann adds.

While businesses may be slow to capitalize on growth, corporate Canada isn't ignoring opportunities for reinvestment altogether. CIBC's Shenfeld says business capital spending has been on a choppy recovery in Canada, with equipment spending growth stalling a bit in the second half of last year.

"But overall, there is an uptrend in place, and survey data show that corporate Canada is planning for a healthy increase in capital spending in the coming year," he continues. "About half of the growth in the coming year will be in the oil and gas sector."

The CIBC indicator, which tracks corporate performance back to 1990, has never been higher and is now 1.36 standard deviations above its long-run average. CIBC says history shows an above average index reading has corresponded with higher levels of investments. That in-turn contributes to economic growth.

And yet heavy cash holdings and conservative balance sheets could represent management pessimism over the business climate ahead. While business confidence waned a bit in 2011, it finished the year still slightly above its long-run average. In addition, at only three per 1,000, the business bankruptcy rate is the lowest it's been in at least 30 years.

"We don't think that's the case this time, but if you are really worried about future profits, you might retain more cash and avoid taking on debt," he adds. "Business confidence numbers suggests that's not the cause this time.

While economic growth looks to be still only moderate for now, CIBC believes Canadian companies that were well positioned to cope with the financial crisis are now at a point where they could begin to reap the benefits and drive economic growth in the years ahead, the report adds.